The basic concept of “substance over form” influences lease accounting. Explain.
The basic concept of “substance over form” influences lease accounting. Explain.
Homework Answers
The Financial Accounting Standards Board has classified ‘Leases’ as Capital Leases and Operating Leases. The nature of Capital Lease is similar to that of Installment purchases whereas the nature of Operating Lease is similar to a letting-out for usage.
Moreover, ownership during and at the conclusion of lease agreements gets affected in the two types of lease agreements.
In books of accounts, Lease can be classified and recorded in 2 ways: 1) Rental Agreement or 2) Sale/Purchase funded by Long term Loan funding. Therefore, by its FORM though it seems to be a mere rental agreement, one has to properly understand the SUBSTANCE of the agreement to differentiate whether it’s the former ie Rent agreement or the latter ie Installment Purchase/Sales. This judgement requires skills and professional competency too.
Thus the term ‘substance over form’ in lease accounting is explained.
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The basic concept of “substance over form” influences
lease accounting. Explain.
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